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Rehabilitating insolvent firms: law & economics (RIFLE)

Research project TA/00/05 (Research action TA)

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Description :

Recovery schemes for distressed companies are a recent development in Belgium. The reorganization of an insolvent debtor or the transfer of entire companies in going concern to a third party was prevented by several legal and practical obstacles until 1998. As a result, not only insolvent and inefficient companies were driven out of business, but also profitable and/or innovative companies.

As a reaction, the Law on Judicial Composition (“Wet Gerechtelijk Akkoord” – hereafter: LJC) was enacted in 1997, with the objective to drastically reduce value and employment losses of bankruptcies, and to save valuable and operational profitable companies by means of financial reconstruction. However, this insolvency procedure has failed to achieve its objectives. Up to 75 % of all companies filing for a judicial composition are declared bankrupt, which has contributed to a negative perception resulting in a considerable drop in the petitions. As a result, the rescue of valuable companies has to be realised for the most part after bankruptcy, while this procedure was designed for companies that are irretrievably beyond redemption. Still most foreign reorganization procedures such as the German Insolvenz-procedure and American Chapter 11-procedure yield positive results.

The main objective of the research project consists in an assessment of the recovery mechanisms for distressed companies in Belgium from both an economic and a conceptual-juridical point of view, and in the formulation of proposals with respect to adjustments of the legal framework in order to reduce the loss of business value through insolvency procedures. The research project will focus on two universal recovery mechanisms for small to medium-sized companies:

(a) the financial reconstruction of insolvent companies and
(b) the transfer of entire companies in going concern to a third party.

The main issue of the former recovery scheme (a) exist in the reconstruction of the distorted financial structure, whereby the company assets are not transferred to a third party. The entrepreneur will in this case bargain with the financial institutions and with potential new investment partners in order to draw up a feasible and efficient recovery scheme. The latter mechanism (b) involves the transfer of the distressed company to a (sound) third party, whereby the redeployment of the assets within the business of this third party will be economically efficient. The research project mainly focuses on the optimal transfer system (auction vs. bargaining) in this respect.

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